Neyveli Lignite Corporation – The Mining Saga

June 19, 2008

Neyveli Lignite Corporation Ltd [NLC] owns the largest mines in India. It is a a 93.6% government owned company, was incorporated in 1956. It is engaged in lignite mining and power generation. The company owns the largest open cast mechanised mines in India, all situated around Neyveli in Tamil Nadu.

ENAM Direct has initiated coverage on NLC with a BUY Rating. NLC holds the maximum reserves of lignite in the country, handling as much as 90% of the total reserves. It currently has a mining capacity of 24 million tonnes of lignite, which is used to fuel its 2,490 MW of power generating capacity. It also sells about 10% of the raw lignite it mines to small-scale industries.

The cash-rich NLC plans to expand its power capacity by almost 5 times to 11,990 MW and its lignite mining capacity by two and a half times to 61.9 million tonnes by the end of the XII Plan (FY15-FY17).

Lignite, also known as ‘brown coal,’ is a cheaper alternative to coal. Considering the current global shortage of coal and the surge in coal prices, and the huge capex planned for thermal power plants in India, we expect lignite to emerge as the most cost-effective alternate fuel in India.

NLC is better placed to consistently expand its power capacity by sourcing scarce fuel captively without any uncertainty in the long run. It is also well positioned to reap the benefits of higher realizations from merchant sales of lignite.

Banking on the twin benefits of availability of scarce fuel for its power generation for decades to come and significant rise in realisation from merchant sales of lignite, we consider NLC as a stock worth preserving for the next generation. ENAM has a BUY recommendation on Neyveli Lignite Corporation for long-term investors at CMP of Rs 113, which is 12.8x FY10 EPS, with a price target (for medium term) of Rs 250.